New York City-based Talkspace, Inc. (TALK), a virtual behavior healthcare company, made its stock market debut on June 23, 2021. To do so, it merged with a special purpose acquisition company, Hudson Executive Investment Corp. And on October 19, the company announced the launch of live chat sessions that allow members to message their therapist in real-time. However, the stock has declined 38.6% in price over the past month to close Friday’s trading session at $2.24.

Furthermore, TALK's shares have lost 35.3% since the company announced on November 15 that its co-founder and CEO, Oren Frank, and its co-founder and Head of Clinical Services, Roni Frank, will step down from their respective roles and from the company’s board of directors. 

Consequently, three analysts have lowered their recommendations on the stock. Stephanie Davis, an analyst with SVB Leerink, said, “Our downgrade comes down to a combination of missteps in both execution and messaging.” So, TALK’s near-term prospects look bleak.

Click here to checkout our Healthcare Sector Report for 2021

Here is what could shape TALK’s performance in the near term:

Data Privacy Issues

With increased focus on mental health issues and penetration of digital technologies such as telehealth, especially amid the COVID-19 pandemic, the behavioral health market is expected to grow significantly in the foreseeable future. According to a Precedence Research report, the U.S. Behavioral Health Market is expected to reach $132.40 billion by 2027.

However, with increasing cyberattacks, therapy apps are vulnerable to data and privacy breaches, and it is uncertain if the apps can protect the sensitive data shared. In August 2020, TALK was accused of mining the data from clients' private therapy conversations.

Ongoing Investigation

This month, several law firms have launched investigations into TALK and its officers and directors for potential violations of federal securities laws. The investigation is regarding the press release issued by the company on November 15 announcing that its co-founder and CEO, Oren Frank, had decided to step down from his position as CEO and board member.

Weak Financials

TALK’s total revenue increased 22.6% year-over-year to $26.36 million for the third quarter ended September 30, 2021. However, the company’s revenue was below management’s expectations due to fewer B2C customers and a one-time non-cash reserve adjustment for credit losses on receivables related to prior periods.

The company’s cost of revenues increased 90% year-over-year to $12.19 million. Its operating loss came in at $25.23 million compared to $2.40 million in the prior year’s quarter. Also, its adjusted EBITDA was  negative $20.85 million compared to a $2.05 million in the year-ago period.

POWR Ratings Reflect Bleak Prospects

TALK has an overall F rating, which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. TALK has a D grade for Momentum, which is in sync with its 38.6% loss over the past month and 54.2% decline over the past three months.

The stock has a D grade for Growth, consistent with analysts’ expectation that its EPS will remain negative this year and next year. TALK also has a D grade for Stability.

Of 87 stocks in the Medical – Services industry, TALK is ranked #84. Click here to see the additional POWR Ratings for TALK (Value, Quality, and Sentiment).

Bottom Line

TALK’s shares are currently trading below their 50-day and 200-day moving averages of $3.75 and $7.41, respectively, indicating a downtrend. The company faces intense competition from other players in the digital health space, such as Teladoc Health, Inc. (TDOC) and American Well Corporation (AMWL). Furthermore, analysts expect its EPS to remain negative in the coming quarters. So, TALK is best avoided now.

How Does Talkspace (TALK) Stack Up Against its Peers?

While TALK has an overall POWR Rating of F, one might want to consider investing in Medical – Services stocks with an A (Strong Buy) rating, such as McKesson Corporation (MCK), Ortho Clinical Diagnostics Holdings plc (OCDX), and Cerner Corporation (CERN).

Click here to checkout our Healthcare Sector Report for 2021

TALK shares fell $0.06 (-2.68%) in premarket trading Monday. Year-to-date, TALK has declined -79.28%, versus a 26.64% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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